Rotblut: Bearish Sentiment Unusually High

Bullish sentiment increased 0.3 percentage points to 30.5 percent in the latest AAII Sentiment Survey. The slight change kept optimism that stock prices will rise over the next six months below its historical average of 39 percent for the eighth consecutive week. This was also the 19th time in 22 weeks that optimism has been below average.

Neutral sentiment, expectations that stock prices will be essentially unchanged over the next six months, fell 1.3 percentage points to 28.2 percent. This is the ninth consecutive week that neutral sentiment has been below its historical average of 31 percent.

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Bearish sentiment, expectations that stock prices will fall over the next six months, rose 1.1 percentage points to 41.3 percent. This was the fifth time in the past nine weeks that bearish sentiment has been above 40 percent. It is also the 27th time out of the last 30 weeks that bearish sentiment has been above its historical average of 30 percent.

The numbers show continued pessimism on the part of individual investors. Bearish sentiment is back to being more than one standard deviation above average, making it unusually high, but not extraordinarily so. Bullish sentiment, though below average, is not yet at levels that would make it usually low, however.

The pessimism is a continued reaction to the negative headlines. Individual investors are concerned about the volatility in stock prices, the slow pace of economic growth, sovereign debt concerns (both in the U.S. and in Europe) and Washington politics.

This week's special question asked AAII members about their longer-term outlook for stocks. Specifically, we asked whether stocks had more potential upside or downside over the next 12 to 24 months. The majority of respondents thought stocks had more potential upside, though a sizeable minority anticipated more downside. Many predicted continued volatility, even those who anticipated stocks to show gains or losses.

Several members pointed to next year's presidential election as a potential catalyst.

(How the election results will affect stocks depended on the member's political bias.)

When we asked the same question last April, the responses were divided, with slightly more AAII members anticipating a further rise in stocks prices over the next 12 to 24 months than those who thought stock prices will fall.

Here is a sampling of the responses to this week's special question.

"I don't think the world is going to end, so I expect more upside than downside despite mediocre to little growth in developed markets."

"It does seem that, longer term, stocks are cheap. If another full-blown recession can be avoided, stocks should be higher in the long term."

"I expect generally more upside, but there are so many events that will steer the market sharply down."

"More volatility ahead. I anticipate spurts, both up and down."

"More downside. European and U.S. debt problems combined with the inability to tackle financial commitments will weigh economic opportunity down."

"The longer-term prognosis will depend on the 2012 election."

This week's AAII Sentiment Survey results:

Bullish: 30.5 percent, up 0.3 percentage points

Neutral: 28.2 percent, down 1.3 percentage points

Bearish: 41.3 percent, up 1.1 percentage points

Historical averages:

Bullish: 39 percent

Neutral: 31 percent

Bearish: 30 percent

The AAII Sentiment Survey has been conducted weekly since July 1987 and asks AAII members whether they think stock prices will rise, remain essentially flat, or fall over the next six months. The survey period runs from Thursday (12:01 a.m.) to Wednesday (11:59 p.m.)